What IIP numbers reveal: Do not expect an early investment recovery, jobs may suffer too

When will the economy see the much-needed investment demand revival it so sorely needs? The industrial production figures for July released on 12 September made that question a bit more difficult to answer.

A caveat first. The index of industrial production (IIP) is quite outdated. Sunil Sinha, principal economist, India Ratings & Research, is bang on when he writes: “IIP is failing to measure the manufacturing/industrial growth in the economy due to its old base”.

But what do even these flawed figures reveal? They reiterate the now familiar story of sluggishness in the investment-oriented sectors. The bellwether capital goods sector, which has been in the negative zone since November 2015, saw its biggest-ever decline of 29.7 percent in July. This sector’s performance is a bit lumpy, but a continuous decline for nine months should be a source of worry.

Reuters

Imports could definitely be one reason for the continued sluggishness – imports have been growing annually at around 9 percent – but domestic demand too is not picking up sufficiently.

In fact, the outlook for the near future is a bit conflicting.

On the one hand, the Nikkei India Manufacturing PMI (purchasing managers index) for August, was not only at a 13-month high, but it also recorded an expansion in total order books. It was optimistic about new work and export orders as well. The fact that the consumer durables sector has not seen negative growth at all since June 2015 and has grown at a consistent 5 per cent for the past three months also holds out hope that consumer demand could spur higher capacity utilisation and this, in turn, could perk up investment demand. This hope is also held out by the declining number of stalled projects, because of the work by the Project Monitoring Group.

But the latest State Bank of India Ecowrap report hints that this may not quite be the push the economy needs. It shows that orders awarded in various sectors in April-July 2016 (Rs 981 billion) declined 22.3 per cent over April-July 2015 (Rs 1263 billion). There was handsome growth in only three sectors – irrigation (290 per cent), railways (190 percent) and mining (177 percent). The community and social services sector saw a growth in order of 46 percent. But all the other sectors showed a decline in orders awarded. The power sector saw a drop of 81.5 percent and roads of 50.2 percent. This is certainly not a good augury.

Besides, as the note put out by Aditi Nayar, senior economist at ICRA, points out even if one cancels out the huge fall in the production of capital goods, other sectors too have not put in a stellar performance. The IIP minus capital goods grew only around 2 percent in July against 4.7 per cent in June.

Given all this, the hope for an early investment revival are not too bright. Sure, it will come eventually, but as India Ratings has been pointing out it will be long drawn out. Such a scenario will not hold out much promise for job generation. Manufacturing alone accounts for around 12 per cent of the labour force. In addition, it has a multiplier effect – one job in manufacturing creates at least two jobs in other sectors. Employment has to be top priority for the Narendra Modi government, well into its third year now. If industry doesn’t start investing in new and more capacities soon, the government itself may not have achche din for very long.